USD/INR trades flat as focus shifts to RBI’s policy, US government shutdown
- The Indian Rupee opens flat around 88.90 against the US Dollar on Tuesday.
- Investors are divided over whether the RBI will hold interest rates steady on Wednesday.
- US government shutdown risks keep the US Dollar on tenterhooks.
The Indian Rupee (INR) opens on a flat note around 88.90 against the US Dollar (USD) on Tuesday. Still, the USD/INR pair is close to its all-time high of 88.12 posted last week. The pair is expected to trade broadly sideways as investors await the monetary policy announcement by the Reserve Bank of India (RBI) on Wednesday.
Market experts are divided over whether the RBI will hold the Repo Rate steady at 5.5% and restart the monetary-easing campaign with a 25 basis points (bps) interest rate cut. The major trigger allowing analysts to anticipate a dovish interest rate decision from the RBI is ongoing trade tensions between the United States (US) and India.
Lately, the US has increased H-1B visa fees to $100K and announced 100% tariffs on imports of pharmaceuticals. The impact of these announcements by Washington is significant on the Indian IT and healthcare industries, given their strong reliance on their exports to the US.
On the contrary, the major factor behind market participants anticipating the RBI to maintain the status quo is the strong festive demand since the rollout of Goods and Services Tax (GST) cuts.
Meanwhile, the continuation of the outflow of foreign funds from the Indian stock market has been a major drag on the Indian Rupee. On Monday, Foreign Institutional Investors (FIIs) sold shares worth Rs. 2,831.59 crores in the Indian equity market.
Daily digest market movers: US Dollar trades with caution as US government shutdown looms
- The USD/INR pair trades broadly calm even as the US Dollar trades cautiously amid mounting US government shutdown risks, with Republicans failing to persuade Democrats to agree to support the short-term funding bill.
- At the time of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles around 98.00.
- Both parties have been blaming each other if the stopgap bill fails to pass before Tuesday’s midnight deadline. Democrats want Congress to roll back cuts in healthcare benefits announced earlier this year in return for supporting the bill in the Senate.
- A partial government shutdown would be inevitable if the deadline for the funding bill didn’t push through. Meanwhile, the US Labor and Commerce departments have warned that operations done by their statistical agencies would halt and economic data releases, including employment data for September, would be delayed.
- Meanwhile, increasing hopes of more interest rate cuts by the Federal Reserve (Fed) in the remainder of the year are expected to keep the US Dollar on the back foot. According to the CME FedWatch tool, there is an 89% chance that the Fed will cut interest rates by 25 bps to 3.75%-4.00% in the October policy meeting.
- On the economic data front, investors await the US JOLTS Job Openings data for August, which will be published at 14:00 GMT. US employers are expected to have posted fresh 7.1 million jobs, in line with the prior reading of 7.18 million.
Technical Analysis: USD/INR stays above 20-day EMA
USD/INR trades firmly near its all-time high of 89.12 from the past few trading days. The upward-sloping 20-day Exponential Moving Average (EMA) near 88.45 signals more upside in the pair.
The 14-day Relative Strength Index (RSI) stays above 60.00, suggesting a strong bullish momentum.
Looking down, the 20-day EMA will act as key support for the major. On the upside, the round figure of 90.00 would be the key hurdle for the pair.
Indian Rupee FAQs
The Indian Rupee (INR) is one of the most sensitive currencies to external factors. The price of Crude Oil (the country is highly dependent on imported Oil), the value of the US Dollar – most trade is conducted in USD – and the level of foreign investment, are all influential. Direct intervention by the Reserve Bank of India (RBI) in FX markets to keep the exchange rate stable, as well as the level of interest rates set by the RBI, are further major influencing factors on the Rupee.
The Reserve Bank of India (RBI) actively intervenes in forex markets to maintain a stable exchange rate, to help facilitate trade. In addition, the RBI tries to maintain the inflation rate at its 4% target by adjusting interest rates. Higher interest rates usually strengthen the Rupee. This is due to the role of the ‘carry trade’ in which investors borrow in countries with lower interest rates so as to place their money in countries’ offering relatively higher interest rates and profit from the difference.
Macroeconomic factors that influence the value of the Rupee include inflation, interest rates, the economic growth rate (GDP), the balance of trade, and inflows from foreign investment. A higher growth rate can lead to more overseas investment, pushing up demand for the Rupee. A less negative balance of trade will eventually lead to a stronger Rupee. Higher interest rates, especially real rates (interest rates less inflation) are also positive for the Rupee. A risk-on environment can lead to greater inflows of Foreign Direct and Indirect Investment (FDI and FII), which also benefit the Rupee.
Higher inflation, particularly, if it is comparatively higher than India’s peers, is generally negative for the currency as it reflects devaluation through oversupply. Inflation also increases the cost of exports, leading to more Rupees being sold to purchase foreign imports, which is Rupee-negative. At the same time, higher inflation usually leads to the Reserve Bank of India (RBI) raising interest rates and this can be positive for the Rupee, due to increased demand from international investors. The opposite effect is true of lower inflation.
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